Questions

QUESTIONS- please make sure each answer is a minimum of 180 words.

1.Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.

2.Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule.

a. Payback period.

b. Internal rate of return.

c. Profitability index.

d. Net present value

3. In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

4. What is forecasting risk? In general, would the degree of forecasting risk be greater for a new product or a cost-cutting proposal? Why?

5. What is the essential difference between sensitivity analysis and scenario analysis?

6. Assumptions used in sensitivity and scenario analysis. Give examples,